Promises of yield transform staking from a permissionless network function into a regulated investment contract. The SEC's Howey Test hinges on an expectation of profit from the efforts of others; aggressive marketing directly establishes this expectation.
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Why Promotional Marketing Turns Staking into a Security
A technical and legal analysis of how advertising 'yield' or 'returns' creates the expectation of profit under the Howey Test, overriding technical justifications for protocol architects and CTOs.
introduction
THE REGULATORY TRAP
Introduction
Marketing-driven staking programs create a legal expectation of profit, triggering the Howey Test's security classification.
Decentralized vs. centralized marketing is the critical distinction. A protocol like Lido's technical documentation is inert, but a CEX's promotional campaign promising 'guaranteed returns' creates a central dependency, mirroring the structure of an ETF or bond.
The legal precedent is clear. The SEC's case against Kraken's staking service settled for $30 million, establishing that marketing staking 'as an investment' is the primary factor for security status, not the underlying cryptographic act.
key-trends
HOW PROMISES CREATE LIABILITY
Executive Summary: The Marketing Trap
When staking services aggressively market yield, they inadvertently trigger the Howey Test, transforming a utility service into a regulated security.
01
The Howey Test Trigger: Promised Returns
Marketing materials promising "passive income" or "guaranteed yield" directly satisfy the "expectation of profit" prong. This shifts the legal framework from a simple service agreement to an investment contract, inviting SEC scrutiny as seen with Kraken and Coinbase.
3/4
Howey Prongs Met
$30M
Kraken Settlement
02
The Centralized Manager Problem
When a protocol or provider (Lido, Coinbase, Binance) centrally controls stake delegation, slashing, and rewards distribution, they fulfill the "efforts of others" prong. This managerial role is a core security red flag, especially when combined with promotional yield campaigns.
$20B+
Centralized TVL Risk
>33%
Ethereum Stake Share
03
The Solution: Pure Utility Framing
Compliant staking is framed as a network security service, not an investment. Marketing focuses on decentralization contributions, governance rights, and infrastructure resilience. Rewards are a variable protocol incentive, not a promised APR. This is the stance of Rocket Pool and solo validators.
0%
Promised Yield
100%
Non-Custodial
04
The Data Gap: Opaque Yield Mechanics
Marketing often obscures the fact that staking yield is non-guaranteed and derived from network issuance and transaction fees. Failure to disclose slashing risk, validator downtime, and the variable nature of MEV creates an information asymmetry that regulators view as predatory.
~1-10%
Actual Yield Range
High
Info Asymmetry
thesis-statement
THE SECURITY LABEL
The Core Argument: Marketing Overrides Mechanics
Promotional marketing transforms staking's technical function into a security by creating an expectation of profit from the efforts of others.
Marketing creates a profit expectation. The Howey Test's third prong hinges on a reasonable expectation of profits from a common enterprise. A protocol's technical whitepaper describes a decentralized validation service, but its marketing materials sell a yield-generating investment product. This narrative shift is the legal trigger.
The mechanics are irrelevant. Whether staking uses Lido's stETH or native delegation, the SEC's analysis focuses on the promotional framing. Ethereum's post-Merge staking is functionally identical to many token schemes, but its lack of corporate promotion is the differentiating legal factor.
Counter-intuitive insight: decentralization is a marketing claim. Protocols like Solana or Avalanche emphasize node count and uptime in technical docs, but their foundation's token vesting schedules and ecosystem grant programs are marketed as value-accrual mechanisms for token holders. This conflates utility with investment.
Evidence: The SEC's case against Kraken. The complaint explicitly cited Kraken's marketing of its staking service as an "easy-to-use platform that allows you to earn rewards" as evidence it was offering an investment contract. The technical backend was legally secondary.
HOWEY TEST TRIGGERS
The Slippery Slope: From Service to Security
A comparison of how promotional marketing and operational features in liquid staking protocols can shift the legal classification from a service to a security under the Howey Test.
| Howey Test Factor / Feature | Pure Infrastructure (Non-Security) | Promotional Protocol (At-Risk) | Centralized Exchange (Clear Security) |
|---|---|---|---|
Marketing Focus | Network utility, decentralization | APY comparisons, 'earn' narratives | Guaranteed returns, promotional campaigns |
Profit Expectation Source | User's independent analysis | Protocol-facilitated comparisons & dashboards | Explicit promises from the issuer |
Ongoing Managerial Efforts | None; protocol is autonomous | Active treasury management, fee adjustments | Full control over investment strategy & operations |
Common Enterprise | Decentralized validator set (e.g., Lido, Rocket Pool) | Centralized node operator selection & slashing insurance | Issuer's pooled capital and proprietary trading |
Token Utility | Governance & fee capture only | Staked asset representation + potential airdrop farming | Pure investment contract with no utility |
Typical APY Marketing | Displays network staking yield | Highlights 'enhanced' yield vs. competitors | Advertises fixed or target yield rates |
Regulatory Precedent | Framework like LBRY (utility token) | Unclear, akin to early SEC cases vs. Kraken & Coinbase | Established (e.g., SEC vs. Kik, Telegram) |
deep-dive
THE MARKETING TRAP
Deconstructing the Howey Test Through a Marketing Lens
Promotional marketing creates a common enterprise expectation of profit, which is the legal trigger that turns a utility token into a security.
Marketing creates investment contracts. The Howey Test's 'expectation of profits' prong is satisfied not by protocol mechanics but by promotional messaging. A token's technical utility is irrelevant if the marketing sells it as an investment vehicle.
Staking rewards become dividends. Framing token emissions as 'yield' or 'rewards' directly parallels dividend payments in securities law. This is why Lido's stETH and Rocket Pool's rETH face intense scrutiny—their marketing emphasizes financial returns over network utility.
Community hype is evidence. Social media campaigns, influencer promotions, and roadmap hype from teams like Solana or Avalanche establish a 'common enterprise' where token value is tied to the promoter's efforts, not user-driven utility.
Evidence: The SEC's case against Ripple hinged on how XRP was marketed to institutional buyers versus retail on exchanges, proving that context and promotional framing dictate legal classification, not the underlying code.
counter-argument
THE LEGAL MISMATCH
The Protocol Defense (And Why It Fails in Court)
Promotional marketing directly contradicts the legal definition of a decentralized protocol, transforming staking into a security offering.
Protocols are not securities under the Howey Test if they are truly decentralized and functional. The SEC's case against Coinbase and Kraken staking services pivots on this distinction. Their enforcement actions allege that marketing staking as an 'investment' or 'yield' creates an expectation of profit from the efforts of others.
Marketing creates a 'common enterprise' by centralizing promotional efforts. A protocol like Lido or Rocket Pool can be decentralized in code, but its foundation's aggressive APY campaigns create a unified profit motive. This is the legal wedge the SEC uses to argue staking is a security, regardless of the underlying technology's architecture.
The 'sufficiently decentralized' defense fails when marketing is centralized. The DAO Report established that token sales relying on managerial efforts are securities. Promotional tweets from a Solana Foundation or an Ethereum Foundation executive are deemed managerial efforts, collapsing the legal separation between protocol and promoter.
Evidence: The Kraken Settlement. Kraken paid $30 million and shut its U.S. staking service because its marketing promised returns. This precedent proves that on-chain decentralization is irrelevant if off-chain promotion is centralized and investment-focused. The court looks at the economic reality, not the whitepaper.
case-study
WHY PROMOTIONAL MARKETING TURNS STAKING INTO A SECURITY
Case Studies in Promotional Risk
Marketing that promises specific returns or uses pooled funds for profit-seeking ventures transforms a decentralized protocol into a centralized investment contract, inviting SEC scrutiny.
01
The Kraken Settlement: The Blueprint for Enforcement
The SEC's 2023 action against Kraken established the modern framework. Their staking-as-a-service program pooled user assets, promised specific returns, and marketed it as an investment product.\n- Key Action: Kraken paid a $30M penalty and ceased the program in the U.S.\n- Key Precedent: The SEC explicitly cited the marketing language and profit-sharing model as evidence of a security.
$30M
SEC Penalty
100%
Program Halted
02
The Lido DAO Dilemma: Protocol vs. Promoter
Lido's $20B+ TVL staking dominance creates a target. While the protocol is decentralized, promotional efforts by the Lido DAO or its grant recipients can create a 'common enterprise' expectation.\n- Key Risk: Marketing stETH's yield as a stable, predictable return versus native ETH.\n- Key Entity: The Lido DAO Treasury funding growth initiatives could be viewed as a promoter using investor funds.
$20B+
TVL at Risk
31%
Ethereum Staked
03
The Celsius Precedent: How Marketing Killed a Network
Celsius's Earn program was the canonical case of promotional overreach. It aggressively advertised up to 18% APY, pooled all user assets, and used them for high-risk ventures like staking and DeFi.\n- Key Failure: The centralized control and promised returns made it an unregistered security.\n- Key Outcome: Chapter 11 bankruptcy and a permanent operational shutdown, setting a catastrophic precedent.
18% APY
Promoted Yield
$4.7B
Assets Frozen
04
The Rocket Pool Defense: Minimizing Promoter Risk
Rocket Pool's design is a case study in mitigation. The protocol is permissionless and non-custodial; the RPL token has no claim on staking profits. Marketing focuses on protocol mechanics, not returns.\n- Key Design: Node Operators post RPL collateral, aligning incentives without profit-sharing promises.\n- Key Distinction: The Rocket Pool Foundation is explicitly structured as a non-promoter, funding public goods development.
100%
Non-Custodial
3.3M ETH
Protocol TVL
FREQUENTLY ASKED QUESTIONS
FAQ: Navigating the Compliance Minefield
Common questions about why promotional marketing can turn staking into a security under the Howey Test.
Promotional marketing frames staking as an investment contract, satisfying the Howey Test's 'expectation of profit from others' efforts' prong. When a project like Lido or Rocket Pool heavily advertises yield, it signals that profits are derived from the managerial efforts of the protocol team, not just passive network participation.
takeaways
AVOIDING THE HOWEY TEST
Actionable Takeaways for Builders
Promotional marketing creates an expectation of profit from others' efforts, the core of the Howey Test. Here's how to build staking that's a utility, not a security.
01
Decouple Token Rewards from Protocol Profit
The SEC's case against Kraken centered on marketing returns as an investment. Your staking rewards must be a discrete service fee, not a share of revenue.
- Key Benefit 1: Frame rewards as gas fee rebates or protocol usage credits.
- Key Benefit 2: Use a fixed-rate model (e.g., Lido's stETH yield from Ethereum) instead of a variable % of your protocol's profits.
0%
Profit Sharing
Utility
Primary Focus
02
Market Utility, Not Yield
Promotional language like "Earn 20% APY" is a direct trigger. All public communications must emphasize network security, governance rights, or access to features.
- Key Benefit 1: Highlight slashing penalties and validator responsibilities to underscore risk/effort.
- Key Benefit 2: Showcase integrations (e.g., Aave's GHO or Maker's sDAI) where the staked asset enables specific utility, not passive income.
APY
Never Lead With
Security
Lead With
03
The Lido Precedent: Staking-as-a-Service
Lido's stETH is not marketed as an investment in Lido DAO. Rewards are purely the native Ethereum yield, and stETH's value is its liquidity and composability across DeFi protocols like Aave and Curve.
- Key Benefit 1: Non-custodial, permissionless design places effort/risk on the user.
- Key Benefit 2: The secondary market price of stETH is detached from Lido's business performance, breaking the "common enterprise" prong.
~$30B
TVL Model
DeFi
Utility Vector
04
Implement Irrevocable, User-Controlled Lockups
If users can withdraw at any time with no penalty, it weakens the investment contract argument. However, for true utility staking (e.g., collateral), enforce irrevocable locks or unbonding periods.
- Key Benefit 1: Mimics Ethereum's native staking model, a recognized non-security activity.
- Key Benefit 2: Clearly demonstrates capital is at risk and being used for a specific, time-bound network function.
>7 Days
Unbonding Period
User-Risk
Emphasized
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